AUD/USD quotes may drop down to 0.736 and 0.726 due to oppositely-directed monetary policies and trade war

Divergence on the Fed and RBA monetary policies and the trade war between the USA and China became a real problem for the of the Australian dollar’s fans. It has lost about 5% against its US namesake since the beginning of the year, and became one of the three main outsiders among G10 currencies. According to Pendal Group fund, AUD/USD can well drop another 10% down, towards the middle of the trading range 0.6-0.7 on the RBA unwillingness to increase cash rate above its current 1.5% level, accompanied by the Fed intentions to continue its monetary normalization cycle. To avoid the US economy overheating, the Fed may have to change its monetary policy from neutral to tight.

At its meeting in June, FOMC expressed its willingness to hike the federal funds rate in 2018 four times, in 2019 – three times, and one more time in 2020. Finally, it should be up at 3.375%, which is higher than the neutral one at 2.9%. At the same time, RBA isn’t going to normalize its monetary policy. It says, Australia, unlike other countries, has managed to avoid recession; and so, it makes no sense to follow other central banks and gradually raise the rate, getting it to the norm. Then, it is necessary that the inflation rate and GDP should increase, and the unemployment rate should be down to 5%. Australia doesn’t feature all this yet. Yes, GDP was up in the first quarter at 3.1% YoY, from 2.4%; but neither consumer prices, nor average wages feature strong rise; and the unemployment rate is down only at 5.4%.

The divergence in the Fed and RBA monetary policies resulted in that the spread between Australian and US 10-year yields has become negative since at least 2000. According to the gap between these two countries’ government bond rates, the Australian dollar should cost about $0.5. The soon end of the US economic cycle suggests that this estimate is too low; nevertheless, the AUD/USD bearish potential is far from being exhausted. Hedge funds also understand that; they have preferred net shorts for Aussie since the beginning of the year.


Dynamics of AUD/USD and  the spread between Australian and U.S. bond yields 

Source: Reuters

Dynamics of AUD/USD and speculative positions for the Australian dollar

Source: Bloomberg

In addition to opposite principles of monetary policies, Aussie is affected by risks of full-scale trade war between the USA and China. Canberra must be desperate, as it negotiates with the EU about a free-trade zone. China, affected by Donald Trump’s threats, can well replace buying Australian goods by American ones, which will have a negative influence on Australia’s export. At the same time, global economy will decline, followed by a worse risk appetite and the commodity market state.

Dynamics of AUD/USD and commodity prices

Source: RBA

I think, AUD/USD can continue falling down, and the former strategy to sell during the price rebound from important resistances is still relevant. As the Fed grows more likely to raise the rate four times in 2018, the pair is likely to drop down deeper, towards 0.736 and 0.726









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Price chart of AUDUSD in real time mode

The Fed Leaves Aussie No Chances

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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